A Superior Time to be Resolutely Average
BOSTON — Everyone with average performance in their mutual funds, step to the head of the class.
This is no quiz about investment prowess for you or your mutual fund manager. This is about smarts. About paying attention.
Answer these simple questions to determine whether you did, in fact, have your eyes pointed at the blackboard or whether they were focused on some far away place outside the classroom window, as gentle spring breezes caressed and cajoled fluttering leaves, newly formed along artful tree branches. (Going to class in early June was SUCH a challenge.)
Did you panic and sell when the Dow Jones Industrial Average made a swan dive for 8600?
Did you become buoyant and buy when it headed over 9000?
When the Dow pulled a 200-point belly flop, did you have visions of spending your retirement years living under a bridge?
If you answered yes - well, to quote Groucho Marx's reference to his college alma mater: Watsamatta U?
For months, we've pounded the table about "dollar cost averaging." It's dull. It's boring, and it will eventually put your children through college and let you visit your grandkids without having to thumb a ride on the interstate.
And this last quarter was an opportune time to put it into practice.
Dollar cost averaging involves nothing more complicated than investing a regular amount of money at regular intervals - $100 a month, for example, on the 15th of every month.
This technique means that when stocks are down, you'll not only be buying them but more of them with your $100. And since stocks consistently go up, over time, the stocks you bought in the dips will be worth more when you're ready to cash out.
Trying, by contrast, to time the highs and lows of the market is like playing the lottery with someone else's numbers. Don't go there.
You can find a terrific example in Jim Tyson's story on sector investing. The market has beaten down energy companies. Some analysts think this is a fine time to buy.
Others say no. John Bollinger of Bollinger Capital Management in Los Angeles, for example, successfully called the dry hole in oil stocks in May, while others saw a future full of gushers.
And Mr. Bollinger can't see the bottom yet. "There is going to be a continuing stream of bad news issued by the energy companies," he says.
But if you get the message about dollar cost averaging and decide set your sights on oil, you'll be investing at the bottom, no matter when it happens.
As for the most promising sectors, he has one word: quality. "If you want to stand a chance of outperforming this market, you better be way over-weighted" in great companies with high potential for profit growth - General Electric, Microsoft, GTE, Lucent, etc.
These are uncertain times in every financial market except the US. So the place to be is the companies that can both withstand and profit from international uncertainty while taking advantage of a strong US economy.
For example: Stocks of the 50 largest companies in the Standard & Poor's 500 Index (a broad measure of the stock market) rose 8 percent last quarter. The other 450 lost 2 percent.
So the place to be is those nifty 50.
Another savvy strategist, Richard Babson, chairman of financial adviser Babson-United in Wellesley, Mass., paints a market picture with a similar case for dollar cost averaging.
Over the near term, he says, the Dow could fluctuate between 9500 and 8000, with the strength coming from high-quality growth stocks. If he's right, and if you stick with being an average investor, you'll eventually achieve superior results.